12/09/2005
Measuring the Cost of Poor Quality
The “cost of poor quality” of an organization is the difference between the actual operating cost and what the operation cost would be if there were no failures in its systems and no mistakes by its staff (Bland et al., 1998)
What is “cost of poor quality” – a few different definitions:
The “cost of poor quality” of an organization is the difference between the actual operating cost and what the operation cost would be if there were no failures in its systems and no mistakes by its staff (Bland et al., 1998)
The costs of quality are those costs that are incurred to prevent a shortfall in quality and a failure to meet customer requirements, as well as costs incurred when quality does in fact fail to meet customer requirements (Horngren et al., 1996)
“Whether it is called quality cost or poor quality cost, it is designed to reduce the cost associated with poor quality (Harrington, 1999).
The term “Quality of poor quality” means mainly the costs of finding and correcting defective work.
Why measure quality costs?
Poor-quality cost provides a very useful tool to change the way management and employees think about errors. It helps by
Identifying quality problems
Getting management attention
Changing the way the employee thinks about errors
Providing better return on the problem-solving efforts – poor-quality cost can be used to identify opportunities, to help prioritise those opportunities and to set targets and measure progress
Providing a means to measure the true impact of corrective action and changes made to improve the process
Providing a simple, understandable method of measuring what effect poor quality has on the organization and providing an effective way to measure the impact of the quality-improvement process
What costs should be included?
Traditional quality cost system has its origin from the early 1950s. Feigenbaum’s(1956) classification of quality costs in the familiar categories of prevention, appraisal and failure (PAF) have been universally accepted (Plunkett and Dale, 1987). The traditional systems are mainly internally company forecasted and reactive by nature. Improvement activities are prioritised according to easily identifiable measures like failures and rework, and negative feedback from the customer after problems have occurred, Customer requirements needs and expectations are not used proactively to direct quality improvement, and increased customer satisfaction and loyalty is not included in the measure, Performance measurement and top management decisions are usually based on traditional accounting information, which is inadequate to monitor and direct quality improvement. Standard cost systems usually institutionalise waste by relating it to a pre-established standard.
The term “poor quality cost” are used here to stress that prevention and appraisal costs have been left out compared to Feigenbaum’s PAF model, since they are difficult to measure and have limited application in the strategic decision process. However, it is still important to measure these elements for internal operational use in each department.
Direct Poor Quality Costs
The direct element consists of cost categories that are monitored and perceived within the company, while the indirect element contains costs that are first perceived by the customer, but subsequently returned to the company as lost market shares. The basis for both elements is customer requirements, need and expectations.
Direct failure costs, which are the direct financial consequence of every failure that is discovered before shipment (internal) and all direct costs associated with claims, rejects, warranty administration etc. as a result of problems discovered after shipment (external). Critical failures that have a direct influence on customer satisfaction are monitored by Taguchi’s loss function.
Scrap
Replacement, rework and repair
Troubleshooting or defect/failure analysis
Re-inspection and retesting
Fault of subcontractor
Modification permits and concessions
Downgrading
Downtime
Complaints
Warranty claims
Products rejected and returned
Concessions
Loss of sales
Recall costs
Product liability
<<
back to news archive |
